ICAP Quarterly - Global Trends in Emissions Trading

Issue: 19 23.10.2018

Dear ,

The last months have seen a record-breaking northern hemisphere summer – with pleasant weather for some and catastrophic impacts for others. Against the backdrop of perceptible climate warming, policymakers around the world have pressed ahead with the implementation of their domestic emissions trading systems, with the support of ICAP and the worldwide ETS community.

As always, we are pleased to share the ICAP newsletter, a quarterly summary of the latest developments in emissions trading around the world and activities here at the International Carbon Action Partnership.

For more information on the cap-and-trade programs in force and in the works around the world, please visit the ICAP Interactive ETS Map on the ICAP website. It is updated regularly as new information becomes available.

Emissions Trading Systems (ETS) around the World

New Zealand proposes sweeping ETS reforms

In mid-August, the New Zealand Government began a five-week public consultation on a range of proposed reforms to the New Zealand Emissions Trading System (NZ ETS). The Ministry for the Environment released a consultation document outlining five key changes to the functioning of the system: a coordinated process for deciding and announcing the annual unit supply limit five years in advance, the introduction of auctioning, the development of a new price ceiling mechanism, limits to international units, and the phase down of free allocation for industry.

The proposed reforms follow from the latest NZ ETS review, concluded in mid-2017. Together, they aim to give the government the tools to effectively cap emissions from covered sectors and manage the system in a transparent and predictable way. Work on legislative changes will begin this year and further consultation will follow in 2019, with the aim to fully implement the reforms in 2020. A decision on whether and how to bring agriculture under the NZ ETS is also expected in 2019.

Mexico ETS to start in 2022 after three year pilot program

On 18 September, at the Global Climate Action Summit (GCAS) in California, Mexico’s Ministry of Environment and Natural Resources (SEMARNAT) announced that their carbon market pilot phase will begin in 2019. The pilot is planned for three years, before transitioning to a fully-fledged ETS in 2022.

The development of the Mexican carbon market builds on a successful ETS simulation, as well as the already implemented carbon tax, with the overall aim of halving emissions by 2050 compared to 2000 levels. During the summit, there were also suggestions for collaboration and linking with existing markets in North America. In his speech at GCAS, California Governor Jerry Brown expressed hope that Mexico would consider joining the Western Climate Initiative (WCI).

California publishes draft amendments to cap-and-trade regulation

On 4 September, California’s Air Resources Board (ARB) released draft amendments to the cap-and-trade regulation, specifying changes required by last year’s AB-398 bill adjusting and extending the program to 2030. The proposed amendments reform the cost containment mechanism and set rules for ‘direct environmental benefits’ of offsets, as well as adjusting allocation methods, addressing administrative issues, and establishing formal delinking procedures.

Cost containment reform was a central requirement of AB-398. Under the proposed regulation, the Californian Cap-and-Trade Program will operate with a hard upper price limit (ceiling) of USD 65/tonne in 2021, while maintaining its reserve price at auction, which effectively sets a lower price limit (floor). Between the ceiling and floor prices, two reserve trigger price levels (referred to as “speed bumps”) would result in additional allowances being auctioned from the Cost Containment Reserve.

Ontario winds down cap-and-trade program

Following his campaign promise, Ontario’s new Premier Douglas Ford effectively repealed the province’s cap-and-trade regulation on 3 July, shortly after his election. With the repeal of the cap-and-trade program, Ontario will fall under Canada’s federal carbon pricing backstop measure that is due to take effect in early 2019 for Canadian provinces and territories that do not have adequate carbon pricing instruments in place. Premier Ford has stated that he will contest the federal government’s authority to impose such a measure. Ontario’s Financial Accountability Office estimates that the federal backstop measure would likely induce higher overall costs for Ontarian consumers and industry.

On 24 July 2018, the Cabinet of the Republic of Korea approved the ‘2030 greenhouse gas reduction roadmap‘ and the allocation plan for the second phase (2018-2020) of the Korean Emissions Trading System (K-ETS), both key elements of Korea’s strategy to meet its 2030 target under the Paris Agreement.

The roadmap outlines indicative emissions levels at three-year periods, on a path to achieve Korea’s target of 536 MtCO2e in 2030, and also sets sector-specific reduction targets. According to the roadmap, national emissions are expected to peak around 2020. The plan also reduces the scope for international offsets, increasing the share of domestic mitigation required.

The allocation plan for 2018-2020 sets a total allowance ETS cap of 1.78 billion allowances to be issued to 591 companies, including 134 million allowances for a new entrants reserve and 19 million for market stability mechanisms. Three percent of the allowances will be auctioned in the second phase.

Virginia prepares draft ETS regulation

On 26 September 2018, the Virginia Department of Environmental Quality released a revised draft regulation for its proposed ETS that is to become part of the market of the Regional Greenhouse Gas Initiative (RGGI). The proposed regulation tightens the cap compared to the previous draft to 28 million MtCO2e (short tons) in 2020, which would decline three percent per year to 19.6 million MtCO2e in 2030. The draft regulation is also further aligned with the RGGI Model Rule, for example, including provisions for consignment auctions, an Emissions Containment Reserve and a Cost Containment Reserve.

UK prepares EU ETS contingency plan for a ‘no-deal Brexit’

On 12 October 2018, the UK Department for Business, Energy and Industrial Strategy (BEIS) released an official statement regarding the implications for UK participants in the EU ETS should no deal be reached between the EU and the UK by 29 March 2019 – the scheduled date of the UK’s departure from the EU. According to the statement, with the UK excluded from the EU ETS in the event of a ‘no deal’ Brexit, a ‘Total Carbon Price’ in the form of a carbon tax would apply. However, the UK intends to maintain the current EU Monitoring, Reporting and Verification arrangements beyond the Brexit date in order to ensure continuity.

Although the no-deal scenario is unlikely, both the UK Government and the European Commission taking steps to safeguard the environmental integrity of the EU ETS and prepare participants for the transition. The UK government still hopes to reach an agreement with the EU, and has previously expressed its commitment to continued participation in the EU ETS until the end of phase three.

1 Reported in short tons; one short ton = 0.91 metric tonWhere available, prices reported are the clearing price at the latest auction (denoted with *).Where no auction prices are available, secondary market prices are reported (denoted as **).For conversion into USD, the exchange rate of 23.10.2018 was used.

News from ICAP

Recent Activities

Mexico joins ICAP as an observer

As of 8 October, ICAP is very pleased to welcome Mexico as an official ICAP Observer.

OUT NOW: ICAP Guide to Linking Emissions Trading Systems

The new ICAP Linking Guide provides policymakers with step-by-step guidance throughout the whole process of linking. Distilling practical experience and current theory, the guide details pathways to a linked market and strategies to align system design, as well as covering stakeholder perspectives, the linking agreement and the management of the linked market.

OUT NOW: Second edition of ICAP’s paper ‘Benefits of Emissions Trading’

Updated after two years, the paper summarizes the main arguments for ETS, as supported by empirical evidence. Accompanying the paper is a spreadsheet that provides easy access to the paper’s key references.

ICAP Annual Meeting in New York

On 24-26 September, the 2018 ICAP annual meeting was convened in New York City. The meeting brought together different jurisdictions to share the latest developments in emissions trading and to discuss ICAP’s capacity building, knowledge sharing and technical dialogue activities.

ICAP at the Global Climate Action Summit

ICAP-GIZ International Advanced ETS Course in Hainan, China

ICAP and the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ), together with SinoCarbon and local partners in Hainan, are convening a joint international advanced ETS course from 22-26 October.

DISCLAIMER: The information contained in this newsletter has been carefully researched and compiled by the ICAP Secretariat. It does not necessarily represent the views of ICAP or its members. The ICAP Secretariat does not assume any liability for the accuracy, completeness, or timeliness of the content of this newsletter or the websites that it links to.